TD spent 25 years building its U.S brokerage unit through a series of acquisitions.Mark Lennihan/The Associated Press
Toronto-Dominion Bank has signalled that it won’t invest more in the U.S. online brokerage business by selling its stake in TD Ameritrade Holding Corp. to rival Charles Schwab Corp. as part of a US$26-billion takeover.
If the proposed deal is successful, TD would hold a 13.4-per-cent stake in Schwab, which it would be eligible to sell as early as 2021. The deal is expected to take about a year to complete and is subject to approval by U.S. antitrust authorities.
TD, Canada’s second-largest lender and a significant player in U.S. retail banking, agreed to swap its 43-per-cent stake in Omaha-based TD Ameritrade to make possible an all-stock deal that creates a dominant U.S. brokerage, with US$5-trillion in client assets and 24 million client accounts.
Some analysts expect TD to sell all or part of its stake in Schwab, which is currently worth about US$13-billion, in order to raise capital for acquisitions. The Canadian bank snapped up a series of retail banks in the northeastern and southern U.S. ahead of the global financial crisis, but has not made a major U.S. bank acquisition since 2010.
Analysts peppered chief executive Bharat Masrani on Monday with questions over the bank’s decision to combine forces with a larger rival, rather than continue to expand on its own.
“We believe TD will benefit from having an ownership stake in a more diversified firm with a stronger growth profile,” Mr. Masrani said in a conference call. “If you look at our history in this space, we’ve done very well. We’ve done things that sometimes are unusual in nature, but have turned out to be terrific for the bank.”
select peers comparison
By client assets, trillions $US
Schwab
TD Ameritrade
Other
Fidelity
$7.8
Vanguard
$5.7
Schwab +
TD Amer.
$3.8
$1.3
$5.1
JPMorgan
$3.1
Bank of
America
$2.9
Morgan
Stanley
$2.6
Wells
Fargo
$1.9
E*TRADE
$0.5
Schwab + TD Ameritrade
Breakdown
Q3 2019 daily avg. trades (thousands)
Totals
1,773
718
1,055
Brokerage accounts (millions)
24.1
12.1
12.0
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: charles schwab corp.
select peers comparison
By client assets, trillions $US
Schwab
TD Ameritrade
Other
Fidelity
$7.8
Vanguard
$5.7
Schwab +
TD Amer.
$3.8
$1.3
$5.1
JPMorgan
$3.1
Bank of
America
$2.9
Morgan
Stanley
$2.6
Wells
Fargo
$1.9
E*TRADE
$0.5
Schwab + TD Ameritrade
Breakdown
Q3 2019 daily avg. trades (thousands)
Totals
1,773
718
1,055
Brokerage accounts (millions)
24.1
12.1
12.0
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: charles schwab corp.
select peers comparison
Schwab + TD Ameritrade
By client assets, trillions $US
Breakdown
$7.8
Schwab
Client assets (trillions)
Totals
TD Ameritrade
$5.1
$3.8
$1.3
Other
Q3 2019 daily avg. trades (thousands)
$5.7
1,773
1,055
718
$5.1
$1.3
Brokerage accounts (millions)
24.1
12.0
12.1
$3.8
$3.1
$2.9
$2.6
$1.9
$0.5
Fidelity
Vanguard
JPMorgan
Bank of
America
Morgan
Stanley
Wells
Fargo
E*TRADE
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: charles schwab corp.
Analyst Robert Sedran at CIBC Capital Markets said no Canadian banks seem to have a long-term plan to own a “passive minority stake” in another financial institution. “We assume at some point this value will be redeployed, perhaps into the lower-multiple personal and commercial banking business,” he said in a report Monday.
In what analyst John Aiken at Barclays described as an “elegant solution” to a potential loss of revenue from its U.S. business, TD renegotiated and extended the terms of the sweep deposit agreement that allows the Canadian bank to manage cash in TD Ameritrade client accounts. “As we believe that TD feels it has greater strategic priorities for its capital, we agree with the strategic rationale for a reduced ownership stake,” Mr. Aiken said.
The current deal on deposits, which expires in 2023, provided about $275-million in annual revenue to TD. A new 10-year contract with Schwab starts in July, 2021, and will be less lucrative, but features a longer term. The servicing fee TD earns will be reduced to 15 from 25 basis points (100 basis points equal one percentage point). And Schwab can reduce the insured deposit balance, which stands at US$103-billion, by up to US$10-billion each year until it reaches a US$50-billion floor.
By combining the two market leaders into a single giant, Schwab expects to reap as much as US$4-billion in financial benefits, mostly from cost cutting. The combined companies currently have 28,000 employees and, going forward, many will be based at a campus Schwab established in the suburbs of Dallas. The process of merging the two companies could take as long as three years, and carries integration costs of US$1.6-billion. TD estimates that putting the two U.S. companies together will create $4-billion to $6-billion of value for the Canadian bank, which will have two directors on Schwab’s board.
TD Ameritrade had been searching for a new CEO after announcing in the summer that current chief executive Tim Hockey would leave the company early next year. That search has now been called off, and TD Ameritrade's chief financial officer, Stephen Boyle, has taken over as interim CEO. Mr. Hockey has moved to an advisory role until February.
On Monday, Mr. Boyle said the company “looked at all alternatives,” including making an acquisition of its own, before deciding to sell to Schwab. The discount-brokerage market has been upended by a fierce price war set off by Schwab in early October. San Francisco-based Schwab, a full-service financial firm and America’s largest online broker with US$3.8-trillion of assets under management, slashed its fees to zero for online trading of U.S. stocks, exchange-traded funds and options.
That forced competitors such as Ameritrade, which has US$1.3-trillion in client assets, and others to match the aggressive pricing. The moves sent U.S. brokerage stocks tumbling, and the effect was especially acute for TD Ameritrade, whose revenue could slip 15 per cent to 16 per cent from lost trading commissions.
In Canada, TD was expected to suffer proportionately as a major TD Ameritrade shareholder. The renewed competition set off a flurry of speculation about potential deals in the sector, including the prospect that TD Ameritrade could try to buy smaller rival ETrade Financial Corp., which had long been a rumoured takeover target.
Reports that Ameritrade would instead sell to Schwab, with TD’s blessing, first surfaced last Thursday, pushing shares in the two companies higher. TD Ameritrade’s stock price rose 7.6 per cent on the Nasdaq stock exchange on Monday, while shares in Charles Schwab were up 2.3 per cent on the New York Stock Exchange. TD’s shares increased 0.6 per cent in Toronto.
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James Bradshaw
Andrew Willis